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Taxation in China: Overview & requirements for businesses.

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Taxation in China: Overview & requirements for businesses

This article provides a comprehensive overview of the Chinese tax system, detailing the various tax types, compliance requirements, and key considerations for businesses operating in this market. Whether you are a multinational corporation or a budding entrepreneur, gaining insights into China’s taxation framework will equip you with the knowledge needed to operate in China compliantly.

Key takeaways

  • The standard corporate income tax rate in China is 25%, but preferential rates are available for specific industries, such as high-tech and pollution prevention.
  • VAT is categorised into general (tiered VAT rates of 6%, 9, and 13%) and small-scale taxpayers (a flat 1% VAT rate).
  • Foreign enterprises without a physical presence in China are subject to a 10% WHT on certain types of income unless reduced under a tax treaty.
  • Missing tax filing and payment deadlines can result in penalties and fines ranging from RMB 2,000 to RMB 10,000, plus additional charges for late payments.

Corporate income tax

The standard corporate income tax (CIT) rate in China is 25%. However, to encourage growth, preferential CIT rates are available for specific industries. For example, the high-tech and pollution prevention industries enjoy a reduced CIT rate of 15%, while the software industry benefits from an even more attractive rate of 10%.

CIT is declared quarterly, with the final amount determined during the annual CIT filings and tax reconciliation based on year-end audits.

Small and low-profit enterprises (SLPEs) with annual taxable income below CNY 3 million qualify for a preferential CIT rate. The effective CIT rate for SLPEs is 5%.

For SLPEs to qualify, they must meet the following conditions:

  • Annual taxable income not exceeding CNY 3 million.
  • Number of employees not exceeding 300.
  • Total asset value not exceeding CNY 50 million.

Corporate income tax (CIT) is prepaid monthly or quarterly based on the company’s accounting records. Companies must file CIT tax returns and make prepayments within 15 days after the end of each month or quarter.

The deadline for filing annual CIT is 31 May of the following fiscal year. Additionally, foreign-invested enterprises with frequent transactions involving related parties must prepare an annual affiliated transaction report addressing transfer pricing issues, in addition to the annual CIT filing. Some regions in China may also require foreign-invested enterprises to prepare a separate CIT audit report conducted by a China-certified tax agent.

VAT

Entities in China are categorised into general and small-scale taxpayers, which mainly influences how they should treat VAT. Registration as a general taxpayer offers the tiered 6, 9 and 13 % VAT rate and the ability to offset the input VAT liability. Generally, the VAT rate for traded goods is 13%, while services are taxed at 6%. Additionally, a sales surtax of 10-12% is applied to the net VAT payable.

Exports of most goods are zero-rated, but a refund from the local tax authority might be necessary.

For small-scale taxpayers (revenue under CNY 5 million in the last 12 months), VAT is calculated at a flat rate of 1% of sales until December 2027, with no input VAT deduction.

Moreover, if a small-scale taxpayer’s monthly sales fall below CNY 100,000 or quarterly sales fall under CNY 300,000, VAT does not apply.

The deadline for VAT payment varies, ranging from one day to one quarter, depending on the taxpayer’s payable tax amount. Authorised tax authorities determine the specific deadline. Taxpayers who cannot meet fixed deadlines can pay tax for each transaction individually.

For taxpayers choosing a one-month or one-quarter tax payment period, they must file a tax return and make payments within 15 days after the period ends. Alternatively, prepayment is required within five days after the period ends for those opting for shorter tax payment periods (one day, three days, five days, 10 days or 15 days). They must also file a tax return, make payments within 15 days from the first day of the following month, and settle the tax payable for the preceding month.

Withholding tax

Foreign enterprises without physical establishment or places of business in China are subject to a 10% withholding tax on gross income from dividends, interest, property leases, royalties and other passive income sourced in China unless reduced under a tax treaty. When there’s income from such transactions between an overseas entity and a Chinese business, the China-based client withholds the applicable amount, deducts it from the gross income, and the Chinese tax authorities tax it at a flat concessionary rate.

The China-based client is responsible for ensuring compliance with the withholding tax policies. Failure to do so may lead to penalties, and any repayments are handled between the local tax bureau and China-based client, not the overseas entity.

Stamp duty

Stamp tax applies to all enterprises and individuals engaging in taxable documents or securities trading within China. It also applies to those who make taxable contracts outside China if they are used within China. Stamp tax rates range from 0.005% on loan and finance leasing contracts to 0.1% for property leasing (excluding finance leases) and property insurance contracts.

Other business taxes

  • Customs duties: Taxes on imported or exported goods in China, with rates ranging from 0% to 35%, depending on the item’s type, origin and trade agreements in place.
  • Consumption tax: Imposed on specific goods like tobacco, alcohol, luxury items and environmentally harmful products, with rates varying based on the item’s nature to discourage excess consumption and promote sustainable habits.
  • Real estate tax: Annual tax based on property value or rental income for business use, set at 1.2% of the original building value.
  • Land appreciation tax: Levied on profits from land or property sales, with rates progressing from 30% to 60% based on the profit amount.
  • Deed tax: Applies to land-use rights or property transfers and ranges from 3% to 5% for purchases, sales, gifts or exchanges, with the transferee/assignee as the taxpayer.
  • Resource tax: Imposed on natural resource extraction such as minerals, oil, gas and water, with rates determined by the resource type and quantity.
  • Environmental protection tax: Introduced in 2018, this tax targets entities emitting pollutants, with rates based on the pollutant type and amount released into the environment.

Individual income tax

Individual income tax (IIT) is imposed on all individuals, including Chinese and foreign nationals residing in or deriving income from China. It follows a progressive tax system with rates ranging from 3% to 45%.
Residents’ income is combined as comprehensive income annually for tax calculation. Non-residents, however, have their income taxed monthly or per transaction.

Employers are responsible for accurately calculating and withholding individual income tax from employment-related earnings, such as wages, salaries, bonuses, stock options and allowances, before paying a net amount to the employee.

Taxpayers earning income from business activities must calculate their individual income tax annually. They must submit tax returns to tax authorities within 15 days after each month or quarter and prepay taxes accordingly.

Non-resident individuals earning income from wages or salaries from multiple sources in China must declare and pay tax within the first 15 days of the following month after receiving the income.

Consequences of missing the tax filing and payment deadlines

Failure to complete tax declaration formalities and submit payment information within the specified time may result in penalties. Taxation authorities may require taxpayers to rectify the situation within a set timeframe and could face fines of up to RMB 2,000. In cases of serious offences, fines may range from RMB 2,000 to RMB 10,000.

Furthermore, failure to make tax declarations or adequately pay the tax due can lead to penalties for late payment. The taxpayer may incur fines ranging from not less than 50% to five times the amount of tax unpaid or underpaid, in addition to the required tax payment.

Conclusion

Understanding the different tax types, applicable rates, and filing deadlines is crucial for ensuring compliance and optimising tax efficiency. From VAT to corporate income tax, withholding tax and various other levies, foreign investors should be aware of the specific requirements that apply to their operations. Consulting with tax professionals familiar with Chinese regulations is highly recommended to ensure a smooth and compliant experience.

How Acclime can help

Acclime’s comprehensive suite of corporate tax compliance services ensures that you stay ahead of your tax obligations. Our experienced team collaborates closely with relevant authorities, ensuring timely and accurate completion of your tax filing obligations. Beyond basic compliance, we provide insightful strategies to optimise tax efficiency, minimise liabilities, and maximise returns. By entrusting your tax matters to Acclime, you can focus on core business activities while having confidence in our expertise to navigate regulatory intricacies and mitigate potential risks.


Contact our teams for expert support and further information about accounting & tax requirements in China to ensure you are compliant in the market.

Christophe Marquis, Director, Shanghai, y.shi@acclime.com
Mei Qian, Accounting Services Director, q.mei@acclime.com
Emily Shi, Partner, y.shi@acclime.com


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